Many people are unaware of the advantages provided by self-directed individual retirement accounts. These are also referred to as self-directed IRA or SDIRAs. Even those who are aware may underestimate this account’s wealth-building potential and the amount of personal involvement it typically requires of the investor.
Though governed by complex regulations, the self-directed account allows for the use of alternative investments not available within the confines of a traditional individual retirement account (IRA). Unlike traditional IRAs held at banks and other institutions, SDIRAs are not limited to mutual funds or stocks and bonds. Providing increased control, personal involvement, and greater diversification of investments, SDIRAs are available with tax-deductible contributions or as Roth IRAs (allowing for tax-free distributions).
Before delving more deeply into the advantages of the SDIRA, we’ll touch on some important regulations that investors must understand before opening such an account.
Self-directed IRA Regulations
The Self-Directed IRA structure provides the opportunity to ensure that investments are not moving in the same direction. The IRS permits engaging in virtually any type of real estate investment as long as it does not advantage or employ a disqualified person, primarily defined as the investor and their lineal descendants. For example, you cannot choose to fix the plumbing on-site at your SDIRA real estate investment. You can also not hire your child, grandchild, great-grandchild, or any of their spouses to do so.
Disqualified persons may not conduct any activity or directly benefit through self-directed IRA investments in any way. All profits must be funneled back to the SDIRA. In addition to lineal descendants, the list of disqualified persons includes your investment managers and advisors. This also includes the IRA trustee or custodian, any corporation, partnership trust, or estate in which the IRA holder has a 50% or greater interest. However, it is permissible to hire those included in the further branches of the family tree. Some of these may include siblings, aunts, or cousins.
Alternative assets provide the opportunity for diversifying your portfolio, allowing for investments in private business, cryptocurrency, and more. While the self-directed IRA’s range of investment opportunities is far greater than a traditional IRA, its structure is similar to conventional and Roth IRAs. The goal for all IRA options remains the same – saving for retirement – and a specific age requirement set for withdrawals. The primary difference between a traditional IRA and an SDIRA is the wide variety of investments. Some of which include traditional and alternative investments. Also, the self-directed IRA requires a far greater personal involvement and responsibility in selecting and growing the investments.
Some examples of self-directed IRA alternative investments include:
- Foreclosure properties, residential or commercial real estate, improved or raw land tracts
- Mortgages, mortgage pools, deeds, notes, and tax liens
- Limited liability companies and partnerships
- Precious metals, foreign currencies, and certain coins
- Private loans
- Private equity funds and investments
Invest in What You Know
The SDIRA allows individuals to use their knowledge base, areas of interest, and expertise to invest in their future and ensure a healthy retirement. The self-directed account’s primary advantages allow you to understand generating tax-deferred or tax-free gains on investments. For example, a real estate entrepreneur may use their SDIRA funds to purchase houses, foreclosure properties, or invest in tax liens. A farmer may wish to invest in land, livestock, and horses. To succeed with your self-directed account, follow the counsel of well-known investor Peter Lynch, “Invest in what you know.”
Direct Your Future
While a custodian or trustee administers a self-directed IRA, the account holder directly manages it. This provides a more significant opportunity to control your investments. It’s the responsibility of the self-directed IRA investor to choose an asset, carry out due diligence and direct the investment. So, while self-directed IRAs can be a phenomenal asset, those who enjoy the most remarkable success are adept at finding great deals. They’re wise in the pursuit of investments in line with their hobbies or way of making a living. If you’re ready to enjoy the wealth-building benefits of a self-directed IRA, contact RITA to get started.